Quote from @Matthew Crivelli:
Quote from @Jay Hurst:
Quote from @Kristi K.:
Quote from @Erik Estrada:
They are technically more expensive than a traditional 30 year fixed.
Let's compare two scenarios I priced out, Borrower Paid Broker Compensation
Purchase Price: $500,000
SFR
30 Year Fixed
Credit 740
DSCR over 1.00
Meets DTI Requirement
1. DSCR
No PPP
Rate: 8.75%
PAR
30 Years Fixed
2. Conventional, UWM
Rate: 8.00%
Lender Credit: $620
30 Years Fixed
You have to consider that a conventional loan does not have a Prepayment Penalty. The added Prepayment Penalty, makes the loan technically more expensive than a traditional conventional refinance if you decide to refinance in 1-5 years.
BUT,
If you do not plan on refinancing your loan in 1-5 years, then you could get better pricing on a DSCR loan.
Same scenario, with a 5,5,5,5,5 PPP structure
Rate: 7.25%
PAR
30 Years Fixed
I just closed on a DSCR loan at 5.7% last week. 7.25% is insane…
On both conventional and DSCR programs you can get any rate you would like. It just depends on how much you pay to get that rate. You pay in two ways: Upfront cost and in pre-payment penalty. The more you pay upfront the lower the rate, but you have to make sure to do the math on what you payback period will be. The lower you get down in rate the more that payback has some diminishing returns. If a payback is really over 3 years it is not likely worth, but you can buy down to make your payback 20 years plus which of course is insane. But, hey, you have a low rate.
and of course a lot of DSCR loans are quote with a 5 year pre-payment penalty which of course can be VERY expensive if you have a 5 year flat 5% PPP and either rates drop or market conditions are such that you would like to sell the property. 5% of 300k for example would be 15k. You have paid for that monthly savings on the front AND back in that case.
The buydown has increasing returns in you don't refinance. Most buydowns on DSCR loans take 4-5 years to get into the green, no difference if you buydown 1pt or 5pts. It's only diminishing if you refinance before the payback period has ended. I'm not seeing rates going much lower than 5% in the near future. The last cycle where rates were on a downward trend started in 1984 and ended in 2021. Are you thinking this new cycle of higher rates is at its peak and we are going to head back to the 3%-4% range? Doesn't seem like the FED has much control this time around considering the 10Y T bill (and 5Y) continues to march higher even with the FED fund rate dropping. Are you thinking government spending is going to actually get cut and inflation was just a flash in the pan? History tells a much different story. Buydowns make sense for many buy & hold investors IMO.
if you can tell the future with 100% accuracy sure it would be an easy decision. and yes, for some buying down a 1-3 points can absolutely make sense. You only mention refinancing which is not only done to lower rate, but also can be used to take advantage of runup in housing prices to allocate to other investments that might generate a higher return. and of course selling the property within that pay back period. A lot of forever houses on the primary side and buy to hold forever are far from forever. Lastly, plopping down 5% points for a marginal savings on a monthly payment might not be the most effective use of those funds, maybe being able to buy the next a bit quicker would generate a higher return for the cash.
and no, I do not believe we will see rates below 5%, and the fed has never had any control over mortgage rates with the fed funds rate as that is the shortest possible rate overnight borrowing between banks. The fed did lower rates more or less directly in 2008 when they started buying agency mortgage backed securities which sets mortgage rates directly. They kept buying, at a much smaller scale all the way to Sept 2022 when primary rates for top tier primary home scenarios were right at 6%. We have been more or less up from there since then. When the biggest buyer in the market is gone, supply balloons and rates have to go up to bring in buyers. So, no I do not think the fed is going to go back to buying MBS to drive down rates. But, all the above in the first paragraph still stands.
Optionality is a good thing and gets overlooked often.
